WEAKNESSES

RISK ASSESSMENT

More sustained growth in 2017, thanks notably to public investment and private consumption

Agricultural production, more specifically coffee production, is expected to increase, thanks not only to better yields from new coffee trees planted in recent years, but also to better weather conditions. The primary sector is also expected to benefit from tax relief on agricultural machines. Infrastructure projects, especially in the areas of transport and energy (hydroelectric projects), will sustain the construction sectors. The launch, expected during 2017, of the oil pipeline to Tanzania (to transport crude oil extracted from Lake Albert from 2020) is also expected to contribute to growth. The start of production at the Isimba hydroelectric plant, expected in 2017, could meanwhile spur on industrial activity. Activity in the services sector (trade, financial services, transport), which accounts for about 50% of GDP, will remain very lively, buoyed by domestic demand.

A gradually less restrictive monetary policy, initiated by an interest rate cut from 14% to 13% decided on October 2016, should support investment and consumption. Household demand (almost 80% of GDP in 2016) should also feel the benefits of higher real incomes, credit and employment.

Inflation is set to remain relatively stable in 2017. Better harvests and the relative stability of the shilling's exchange rate, will limit the rise in food prices, but the dynamism of domestic demand and an oil bill unlikely to get any cheaper, could prevent a real reduction in inflationary pressures.

Small decline in the public and current account deficits

Public spending is expected to continue to rise in 2017, especially spending on investment given the large infrastructure programmes. But the increase in current spending, notably on salaries, is likely to be more moderate than during the previous tax year (July 2015 - June 2016), undertaken during an election period. Meanwhile, government revenues are expected to increase as economic growth strengthens, some taxes go up (fuel, cigarettes, alcohol) and as measures to broaden the tax base and improve tax collection are introduced as agreed with the IMF. The deficit will continue to be financed by loans, most of them on concessional terms.

The current account balance, structurally in deficit, could improve slightly in 2017. Exports are likely to remain constrained overall by the ongoing political instability in South Sudan, a key trading partner of Uganda. However, exports of coffee (Uganda is Africa's biggest exporter of robusta), having been hit by the drought in 2016, could be boosted by higher production in 2017. Imports, notably of foodstuffs and energy (Uganda is still dependent on external supplies of oil as the exploitation of its reserves has not begun) are expected to remain high. Meanwhile, the need for capital equipment and consumer goods, buoyed by more robust growth, cannot be met by local industry.

The shilling, which stabilised in 2016 after losing around 20% in value against the dollar in 2015, is not expected to depreciate sharply in 2017.

Although healthy overall, the banking sector is weakened by the rise in non-performing loans (8.2% at end June 2016 compared with 5.1% at end 2015), as evidenced by the central bank's intervention to take over control of a struggling bank (Crane Bank) in October 2016.

The political and social situation - stable overall - remains fragile and governance shortcomings persist

Yoweri Museveni, in power since 1986, was re-elected during the February 2016 general elections for a fifth term. His party (NRM) held on to a majority of seats in parliament. The international observers criticised the lack of transparency and the irregularities in the election, the results of which were disputed by the opposition, which was unable, however, effectively but to challenge them. Although it is not a real threat to the presidential party, the opposition finds some resonance in the growing popular discontent with the slowness of improvements in living standards and in implementing reforms, which are a potential source of a degree of instability. The terrorist threat, especially the risk of attacks by the Somali Islamist group (Al Shabaab), which plagues Kenya, remains high.

Despite some progress on respect for the rule of law, the country's performance in terms of governance is mediocre. Uganda's position in the World Bank's rankings on corruption has not improved (184th out of 210 countries in 2015 as in the two preceding years).